PCAOB PILOT PROGRAM TO INSPECT AUDITORS OF BROKERS AND DEALERS

On Monday, August 20, 2012, the PCAOB released its first report on the progress of its interim inspection program for auditors of brokers and dealers (BDs).  The result was a whopping 10 for 10 deficiency rate.  Not bad if you are batting for the Yankees. Not good if you want to minimize another Bernie Madoff scheme.

 

If you remember, a couple of years back the PCAOB required all BDs to be audited by Certified Public Accounting firms that were registered with the PCAOB.  This was to ensure that only the most “reputable” firms would perform these audits.  One problem with this course of action was that the PCAOB was not going to inspect these firms’ audits of the BDs.  Thus, CPA firms could register with the PCAOB and not fear having them perform an inspection of these audits.

 

After a couple of years the PCAOB wised up and decided to pilot a program to inspect 100 firms who audit these BDs.  This program would not publicize the names of any firms it inspected, just the results.

 

During the period from October 2011 to February 2012, the PCAOB inspected 10 audit firms covering 23 audits of BDs registered with the Securities and Exchange Commission (SEC) and identified deficiencies in ALL of the audits inspected.  Yes, I said ALL – that’s 100%.

 

The areas of the deficiencies observed were:

  • Audit procedures related to the computations of customer reserve and net capital requirements
  • Audits of financial statements such as related party transactions, revenue recognition, fair value measurements, evaluation of control deficiencies, consideration of risks of material misstatements due to fraud
  • Auditor independence

 

The PCAOB expects to review approximately 100 audit firms covering portions of more than 170 audits of BDs through 2013.  They will use this testing to assess the compliance of registered firms and their associated persons conducting audits of brokers-dealers with the Sarbanes-Oxley Act, PCAOB and SEC rules, and professional standards. They will also use it to gage the eventual scope and elements of a permanent inspection program.

 

Let’s hope the next 90 are a little better.

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